ii view: tough autumn causes Redrow profit problems

First-half trading update for the 18 weeks to 3 November

• Now expects full-year profit towards the lower end of its previous £180 million to £200 million estimate range.

Chairman Richard Akers said:

"Following the usual summer slowdown we reported in our 2023 results announcement, the housing market has remained subdued through the Autumn. The business has had to adapt to this more difficult trading environment in terms of build rate and operating costs. However, we continue with our strategy of delivering our high quality, award winning Heritage homes to our target customers."  

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ii round-up:

Mid-sized housebuilder Redrow (LSE:RDW) today pointed towards annual profit at the bottom end of its prior estimates given subdued autumn sales.

Full-year sales of between £1.65 billion and £1.7 billion continue to be expected, but with lower sales and higher cancellations pushing its annual profit estimate to the lower end of its previously detailed £180 million to £200 million range.  

Shares in the FTSE 250 company fell 5% in UK trading having come into this latest news up by around 15% year-to-date. Rival Bellway (LSE:BWY) is up by a similar amount, while the FTSE 250 index itself is down by close to 6% during 2023.  

Redrow sells a variety of builds across England and Wales, with air source heat pumps and ground floor underfloor heating now standard in detached homes on new developments.

Sales for the 18-week period stood at 0.49 per outlet per week, down from 0.63 for the same time last year as buyers continued to battle higher borrowing costs. 

Difficulties with mortgages for house movers lower down its buying chains had also caused its cancellation rate to rise to 25% from 22% seen during the prior financial year. The average selling price of private reservations fell 2.5% year-over-year to £471,000.

Its forward order book as of early November stood at £864 million, down from £1.36 billion a year ago. Broker UBS reiterated its ‘buy’ rating on the shares post the update given what it sees as an ‘inexpensive’ valuation. 

First-half results to the end of December are scheduled for 8 February. 

ii view:

Started in 1974 as a small civil engineering business in North Wales, Redrow today competes against rivals like Taylor Wimpey (LSE:TW.) and Barratt Developments (LSE:BDEV). In 2020, it sold its London operations to focus on the regions. Employing over 2,000 people, build completions for its last financial year to early July of 5,436 fell from the prior year’s 5,715. 

For investors, the difficult economic backdrop including elevated borrowing costs cannot be ignored. Planning challenges more broadly persist. Issues regarding legacy fire safety continue to be addressed, while stretched government finances are likely to be making it harder to provide industry assistance as has been the case in the past.  

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On the upside, early 2023 moves to differentiate its builds via features such as air source heat pumps warrant consideration. Cost headwinds for the industry generally have eased as demand has reduced, global supply chains have improved following the pandemic, while an estimated price-to-net asset value of 0.8 times compares to a three-year average of one. That suggests the shares are not expensive.  

For now, the forecast dividend yield is a modest 2.5%, and more cautious investors may decide to await evidence of a recovery in the housing market.

Positives: 

• Pushing build differentiation 
• Net cash held of £125 million

Negatives:

• Ongoing economic outlook uncertainty
• Elevated costs

The average rating of stock market analysts:

Buy